There is clearly a risk to the investing public where the firm managing a portfolio and reporting the performance is the same firm that has custody of those assets. This is akin to student taking a test and giving out the grade too. Firms that serve both roles should be subject to a high level of scrutiny.

That being said, I have great concerns over changing the definition of who has custody. Specifically, designating a firm as having custody simply because they can deduct fees from the client's account makes no sense to me. By making this change you would essentially make every firm subject to the cost and burden of this rule, as this is the standard practice in our industry.

I can't imagine how investor accounts are put at risk because an advisor can direct bill their account. Of all the fraud problems that the commission has had to deal lately, I can't think of any that were the result of direct billing practices. In addition, I believe this change would defeat the purpose of heightened scrutiny for at-risk firms by essentially placing all firms into this category. Not only would the added costs of compliance to low risk firms be unreasonable, I would imagine this would place an unnecessary burden on your enforcement staff as well.

The point of all of this is to specifically separate those firms whose practices create a conflict of interest or threat to the investing public. By potentially placing all firms into this category, you do just the opposite. If there is safety in numbers, I would think that this is exactly what a fraudster would want – to get lost in the crowd.

A commonsense definition of "custody" would identify those firms that have the ability hide their true activities. These are firms that physically take possession of client funds and are solely responsible for reporting the whereabouts of those funds. Including firms in this category via a far-reaching, theoretical definition of custody is counter productive.